In a major decision to bring petroleum products in line with market rates, the government freed petrol from all pricing controls and hiked diesel prices by Rs 2 a litre, Oil Secretary S Sundareshan announced after the meeting of the Empowered Group of Ministers.

The Empowered Group of Ministers, headed by Finance Minister Pranab Mukherjee, met for the second time on Friday in less than three weeks to decide on raising fuel prices. Railway Minister Mamata Banerjee was absent again.

Announcing the hike in prices, oil secretary S Sundaresan said that the prices of petrol and diesel prices will be market-driven. He also said that the government had taken the decision as 'consumers can afford higher prices'.

Even diesel prices will be eventually freed of all administrative controls, Sundareshan said. He said that the government would, however, continue to 'heavily subsidise' the cooking fuels.

Banerjee and Agriculture Minister Sharad Pawar had abstained from the first meeting of the eight-member EGoM on June 7 that was to decide if petrol and diesel prices can be freed from government control, along with hikes in domestic LPG and kerosene rates.

Their absence then was attributed to opposition to increase in rates of diesel and cooking fuel and the EGoM postponed a decision.

Shock! Petrol, diesel, LPG, kerosene prices shoot up

The government panel went with Petroleum Minister Murli Deora's proposal to free petrol prices from government control triggering a hike of Rs 3.73 a litre.

There was near-unanimity on bringing about market-linked prices for petrol, a fuel generally used by the well-off, but it remains to be seen if the Rs 3.73 per litre hike would come into effect immediately or in two equal installments.

However, sources said that the government was divided over freeing diesel prices as the fuel was used by the transport and agriculture sector and, therefore, would have an impact on the already high inflation rate.

The EGoM finally settled for a Rs 2 per litre hike in diesel rates instead of the Rs 3.80 hike needed to make it market-linked, they said.

The Rs 35 per cylinder hike in domestic LPG rates and a Rs 3 per litre hike in kerosene prices was, however, quite surprising as these needed to pass the muster of Banerjee and Pawar.

Shock! Petrol, diesel, LPG, kerosene prices shoot up

With global crude oil trading at below $80 a barrel, Deora was seeing this as the last opportunity to usher in reforms in the sector which, otherwise, would need Rs 74,300 crore (Rs 743 billion) in doles to bridge the gap between retail prices and import costs.

Banerjee late on Thursday evening met Mukherjee ostensibly to discuss the imperatives of fuel price hike. Some say she may have informally agreed for a hike in petrol prices and her absence from the EGoM on Friday may be to serve her political goals in West Bengal by remaining disassociated with the decision.